U.S. Housing, China Are Risks For World Economy In 2007

Despite market inequalities and current-account deficits, the global economy did better than expected this year. World gross domestic product may come in at 5% for 2006. Not bad considering the 45-year average is 3.7%. Morgan Stanley Chief Global Economist Stephen Roach was on “Closing Bell,” and he says the same growth isn’t guaranteed next year.

Roach has a somewhat bleak outlook for '07. "The biggest risks for the global economy," Roach says, "are the U.S. housing market and slowing investments in China. A housing slowdown in the U.S. could cause collateral damage in the export businesses of many countries around the world – especially in Asia. Also, the success China has had in trying to cool its overheated investment sector could slow that economy enough to have a ripple effect globally."

Global Growth 2007

Stephen Roach, Morgan Stanley Chief Economist, projects a 4.3% increase in world GDP for 2007. He shares his economic and market outlook with CNBC's Larry Kudlow.

Larry Kudlow, who is filling in for Dylan Ratigan today, asked if the surge in global growth had anything to do with the rise of free-market capitalism and the middle class in developing countries.

"Not quite," says Roach. "Most of these emerging markets are still producers – not consumers. The focus there is on factory development and exports. China’s consumption, in particular, was a very small percentage of its overall GDP," Roach says.

His prediction for the U.S. GDP next year: between 1.5% and 2% in the first half of the year because of a continuing growth recession. “That will leave us open to an outright recession should anything else bad happen in the U.S.,” Roach says. “We’ll have to keep our fingers crossed we don’t go into an outright recession.”